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Legislation for California Unclaimed Property Voluntary Compliance Program Introduced

By: Cathleen A. Bucholtz Steven Swaigenbaum Matthew B. Chenowth |

On Thursday, February 17, 2022, California Assembly Bill 2280 (“CA AB 2280”) was introduced, which if enacted would finally create a long-awaited opportunity for holders of unclaimed property reportable to the State of California to report the property without the mandatory interest assessment.

Currently holders who report past-due unclaimed property to the State are assessed interest at the rate of 12 percent per annum.  Consequently, the interest can exceed the underlying value of property for transactions reported significantly past due.  In introducing CA AB 2280, the Legislature approximates that 1.3 million businesses that filed taxes with the Franchise Tax Board in 2020 are likely to have failed reporting unclaimed property to the State.  The Legislature also notes that current enforcement efforts, including the threat of audit and the 12 percent interest assessment, have been insufficient to compel businesses to report past due property.

Among other changes, CA AB 2280 would replace the existing Section 1577.5 from the Code of Civil Procedure, which created the one-time California unclaimed property amnesty program during the early 2000s, with a new version to create the California Voluntary Compliance Program.  The proposed provisions of the new Section 1577.5 would:

  • Provide that the revised Section 1577.5 will be known as the “California Voluntary Compliance Program”
  • Authorize the Controller to establish a voluntary compliance program for holders for the purpose of reporting past-due unclaimed property
  • Allow a holder that has not reported unclaimed property or has past-due property to request to enroll in the program using a form prescribed by the Controller
  • Allow the Controller, in their discretion, to enroll eligible holders in the program, noting that a holder is ineligible to participate in the program if any of the following apply:
    • At the time of the holder’s request to enroll, the holder is the subject of an examination or has received notification of an impending examination under Section 1571
    • At the time of the holder’s request to enroll, the holder is the subject of a civil or criminal prosecution involving compliance with the State’s unclaimed property statutes
    • The Controller has notified the holder of an interest assessment under Section 1577 within the previous five years and the interest assessment remains unpaid
    • The Controller has waived interest assessed against the holder within the previous five years
  • Provide that the Controller shall waive interest assessed under Section 1577 for a holder enrolled in the program if the holder does all the following within the prescribed timeframes:
    • Enrolls and participates in an unclaimed property educational training program provided by the Controller within three months after being notified of their enrollment in the program,
    • Reviews their books and records for at least the previous 10 years (beginning from June 30 preceding enrollment),
    • Makes reasonable efforts to perform due diligence no less than 30 days prior to submitting the report required by the program,
    • File initial reports to the Controller within six months after the date on which the Controller notified the holder of their enrollment in the program, unless the Controller sets a different date, and
    • Submit an updated final report and pay or delivers to the Controller all property specified in the report no sooner than seven months and no later than seven months and 15 days after the Controller received the report submitted pursuant to the prior bullet.
  • Allow the Controller to reinstate interest assessed under Section 1577 if the holder does not pay or deliver all escheated property specified in the report submitted pursuant to and within the specified timeframes
  • Provide that the Controller may adopt guidelines and forms that provide specific procedures for the administration of the program

While a proposed California Voluntary Compliance Program would prove to be a great benefit to both companies and the State, there are a few questions that remain unanswered in the bill, including:

  • Why are companies that have received an interest assessment waiver in the past five years excluded from the program?
  • Will there be a formal extension process in place for holders that cannot complete their internal review within the 6 months provided in the bill?
  • Will there be a standard process in place to review a holder’s submissions to the State?
  • Will companies domiciled in California, who do not have complete records for the 10 years covered by the program, be required to estimate past due exposure for the missing periods?
  • Will holders who successfully complete the program be protected from a future audit for the property and periods covered by the program?
  • What are the expectations for ongoing compliance for companies who have participated in the program, and what are the penalties for failure to do so?

In addition to the California Voluntary Compliance Program, CA AB 2280 also has several additional provisions, including a provision to invalidate an agreement to locate unclaimed property if it requires the owner to pay a fee prior to the approval of the claim and payment to the owner.  Furthermore, CA AB 2280 contains language to add exemptions for the disclosure of certain documents obtained by the Controller, including financial records obtained during an audit, and records that may contain personal information of claimants and holders, to protect the privacy of individuals and help combat fraud and identity theft in the State.

It’s interesting to note that with the introduction of CA AB 2280 California appears to be continuing its ramp up of the monitoring of compliance with the State’s UP laws.  In addition to CA AB 2280, California also recently passed CA AB 466, which now requires companies to include on their California Income Tax return filed with the Franchise Tax Board, the taxpayer’s revenue range, whether its previously filed an unclaimed property report with the Controller and, if applicable, the date and amount remitted on the taxpayer’s last unclaimed property report.  It is worth noting that in the California Budget Act of 2019 (SB 109, Chapter 363, Statutes of 2019), the Joint Legislative Budget Committee tasked the State Controller’s Office with exploring options to increase unclaimed property reporting and compliance with the law.  It is currently unclear if the data collected via CA AB 466 will be utilized by the State Controller to identify audit targets and/or in conjunction with CA AB 2280 to invite/suggest enrollment of holders into the newly created Voluntary Compliance Program.  Either way, CA AB 2280 will provide an incentive for businesses to voluntarily comply with the State’s unclaimed property laws without the mandatory imposition of interest on past due property.

True Partners will monitor the progress of CA AB 2280 and will provide updates regarding its progress as it makes its way through the California legislature.

Please reach out to any member of the True Partners Unclaimed Property Management Team if you have any questions about this or any other unclaimed property developments likely to impact your company.

A full copy of CA AB 2280 can be found HERE.